Airlines generally provide preferred pricing to corporate accounts in return for an expected level of revenue, segments or share of the corporation's expenditure on air travel. For example, the airline and corporation will enter into an agreement whereby the airline will provide the corporation a 10% discount on all airline tickets in return for a 35% share of the corporation's total spend on airline ticket purchases. This style of contract element is often referred to as a market share goal. Alternatively, the airline may agree to a predetermined discount if the corporation agrees to spend at least $2 million per year with the preferred airline. This style of contract element is often referred to as a revenue goal. A contract element requiring the corporation to fly a minimum number of segments in a time period is known as a segment goal.
A corporation participating in a preferred airline pricing program will typically receive a discount at the time of ticketing. For example, a $1,000 ticket will be discounted by 10% per the agreement, resulting in a $900 charge to the corporation. These discounts are known as front-end discounts, since they are given at the time of ticketing. Under a front-end discounting program, the airline must trust the corporate account to give the airline enough business to meet the revenue, segment or market share goal stated in the agreement. Alternatively, these discounts can be paid retroactively by the airline, in which case they are known as back-end discounts. Variations of these pricing agreements exist and are well known to the business travel community. Such variations include providing a flat fare for a specified city pair for a specified time period, or providing one free ticket in return for a predetermined number of purchased tickets, or payment of a predetermined amount in return for reaching a volume or market share goal. Most forms of a preferred pricing agreement can be converted to an equivalent discount; hence the term discount herein is meant to include these other forms of preferred pricing. A corporation's travel agent or travel manager is generally responsible for monitoring these agreements and reporting the corporation's compliance level to the airline. Should the corporation not meet the required goal(s), the airline typically has the right to rescind or modify the pricing agreement.
Some pricing agreements provided to a corporate airline customer can be very simple such as 15% off all fares anywhere the airline flies. However, the pricing can often be fairly complex, such as 23% off all transatlantic U.S. fares for trips that do not originate or terminate in Chicago or Dallas and are ticketed in Europe. To properly evaluate an airline's bid one must be able to apply each element of the bid to past or expected spend on the appropriate city pair, point of sale fare class and/or fare basis code, among other factors.
Typically, an airline that serves a significant portion of an account's air spend by virtue of having a hub airport near the account's primary originations and/or destinations will provide less aggressive discounts than will those airlines that would require the account's travelers to take significantly more one-stop flights. Consequently, the corporation may need to evaluate the cost of travel inconvenience associated with an airline's proposed pricing. Doing so would likely require at a minimum the comparison of the relevant airlines' flight schedule for potentially hundreds or thousands of city pairs.
It is also extremely rare for one airline to be able to serve all the destinations traveled to by a corporation's employees, so the corporation will typically negotiate pricing agreements with two or more airlines, such that most of the required destinations are covered. Those airlines which agree to provide a corporation with preferred pricing are known as preferred airlines and the corporation will instruct its employees to give these airlines preference when purchasing airline tickets.
When a corporation selects more than one preferred airline, and if the selected airlines offer significant overlapping coverage of the corporation's city pairs, the corporation will likely want to specify each airline's status among the set of preferred airlines. Note that the lack of a specified status likely implies either equal status, or the status may be obvious to those familiar with specific facts. Illustrative status levels are Primary, Co-primary, Secondary, Co-secondary, Tertiary, etc. These statuses are used to indicate to the airlines, travel agency and travelers which of the two or more competing preferred airlines should be given preference for the corporation's travel. Consequently, by designating an airline's status the corporation further influences the amount of business the airline should expect, and in turn the airline may modify its goals and discounts accordingly.
Typically, a preferred airline will include some form of goal, commensurate to some extent with the amount of business the airline expects or wishes to receive from the corporation, and which the corporation must likely meet in order to continue the benefit of the preferred pricing agreement. These goals often are such that a corporation cannot meet each preferred airline's goals, so that the corporation must choose a subset of the proposed pricing agreements, or negotiate new goals, or risk defaulting on one or more goals and thereby jeopardize one or more preferred pricing agreements.
Another problem with the evaluation of airline-nominated goals is that airlines use different methods for calculating their expected market shares at the city pair and system levels. Consequently, airlines are quite likely to disagree about what each airline's neutral (a.k.a. QSI, QSP or Fair) share is for a given city pair or a given account. Since these neutral market share estimates are the basis for most airlines' construction of pricing agreements, the differences often result in overlapping and inconsistent goals from the travel manager's perspective.
A key problem with the aforementioned business arrangement is the difficulty for a corporation to choose an appropriate set of preferred airlines. In order to make an informed decision, the travel manager should want to evaluate the expected economic value of a reasonable number of alternative sets of preferred airline suppliers using various assumptions (a set may contain one or more airlines and/or one or more assumptions). These sets are referred to as scenarios. Note that even if a travel manager could determine which set of preferred suppliers would likely cost the least, he/she may wish to consider many other factors before selecting a set of preferred airlines, including such factors as carrier reputation and quality of service, likely traveler inconvenience, other business relationships between the corporation and the airline(s), attitude and flexibility of the carrier's sales people, etc.
To illustrate the problem of making an informed economic evaluation of alternative sets of airline suppliers, suppose a corporation receives four bids on its North American travel spend. The term travel spend is herein defined as the amount of money spent annually on airline ticket purchases. The corporation has listed 200 city pairs (which are traveled between by its employees), as well as provided the number of trips and dollars spent traveling on each city pair. Airline A bids a 15% discount on all North American fares; Airline B bids a 17% discount on all North American fares, except the non-refundable fares, which it will discount 10%; Airline C bids a 10% discount on all fares anywhere in North America, unless the trips start or end in Newark, Cleveland or Houston, in which case the discounts on full fares will be 5%, and 0% for all other fares; and Airline D bids a 20% discount on all fares for travel between any city pair that does not start or end in Atlanta. If the travel does start or end in Atlanta, the discount is 12% for all fares except those in the K and L fare classes, for which the discount will be 7%.
Further, each airline has set fairly aggressive market share goals for most of the 200 city pairs. For example, for the city pair Cleveland-Atlanta, assume Airline A wants 30%, Airline B wants 45%, Airline C wants 65% and Airline D wants 70%. Consequently, many of the city pairs may have market share goals that, when added across all of the airlines, add to far more than 100%.
In the aforementioned example, the corporation's travel manager will typically want to pick the two, or possibly three airlines that will provide broad coverage of the corporation's 200 city pairs, while considering the overlap of the bidding carriers' routes, the travel inconvenience caused by taking less convenient flights, and the savings provided by the selected airlines' discount structure. The travel manager will probably not want to name all four carriers as preferred airlines because this will likely limit the travel manager's ability to concentrate travel purchases in return for better discounts, as well as limit his/her ability to deliver the market share required by each of the preferred airlines, and therefore put the corporation's discounts at risk.
Evaluating the economic value of even a small set of preferred airlines requires significant analysis. For example, even if an airline clearly offers the largest discount, it may serve only a small portion of the corporation's city pairs. Or, it may turn out that Airline A and Airline B both serve the majority of the corporation's city pairs, but overlap to a high degree, so that one airline should be chosen over the other.
Another significant consideration is the status of each preferred airline. The economic evaluation of considering Airline A as the corporation's primary preferred airline paired with Airline B as the secondary preferred airline will likely differ significantly from that found by evaluating Airline A as the primary preferred airline and paired with Airline D as the secondary preferred airline. It is apparent that there are many potential combinations of preferred airlines that a travel manager may wish to evaluate. Thus, the basic dilemmas facing a travel manager during airline negotiations are being able to 1) realistically estimate the range of business that his/her corporation can give to an airline, and 2) decide which set of preferred airlines to put under contract.
Therefore, it is desirable that the travel manager have a reasonable estimate of the range of business the corporation can provide any specific airline, together with the supporting details of city pair market shares, revenues and segments associated with each level of overall revenue. Further, it is desirable that the travel manager be able to accurately evaluate each airline's pricing proposal, as well as be informed of the incremental cost or benefit associated with any change in the travel time required to fulfill the scenario.
However, formulating these estimates depend on a number of factors in addition to the flight schedules of the airlines. Factors such as the strength of the corporation's travel policy and its enforcement, each airline's popularity with the corporation's travelers, the airline's status and the travelers' sensitivity to additional travel time should preferably be considered.
In order to rigorously prepare for negotiations with multiple airlines, a corporation would preferably assess a range of likely outcomes by articulating and testing a reasonable number of scenarios. Scenario herein means a prospective set of preferred airlines, together with assumptions about the corporation's ability to move market share to or from any specific airline. Each scenario preferably includes a viable set of preferred airlines, and together the scenarios should represent a reasonable range of preferred airline sets. The benefit of using scenario analysis is that it can reasonably quantify each airline's expected market share and revenue, which in turn can be used to assess the economic value of the scenario to the corporate airline customer. The benefit of scenario analysis to an airline is that it shows the airline the realistic range of revenue it might receive from the corporate airline customer, depending on whether the airline is selected as a preferred carrier or designated some other carrier status.
In view of the above challenges for analyzing potential airline supplier options and negotiating preferred pricing agreements, it is desirable to provide an airline travel supplier analysis system and method for associating complex sets of information necessary for assessing the economic value of a group of airline supplier scenarios. It is further desirable to provide a system and method for analyzing this information for each scenario and generating quantitative information relating to the expected travel volumes and costs of traveling in accordance with each scenario's parameters.
In view of the above, an object of the invention is to utilize the following factors to estimate an airline's scenario market share, and therefore segments and revenue, for each city pair: travel policy factor; airline sales factor; airline status factor; equipment factor and incremental travel time factor.
Another object of this invention is to provide a software tool for rapidly and rigorously calculating the economic value of an airline's current or proposed price agreement.
Another object of the invention is to provide a software tool for calculating the amount of hours spent traveling for each scenario and allow the user to take the value of this time into account when choosing a set of preferred airlines.
Another object of the invention is to provide a software tool that allows an account or airline to set one or more indexed goals that accommodate changes in the airline's flight schedules and/or the account's travel pattern.